U.S. SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                    FORM 10-Q

        X         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
      ------        OF THE SECURITIES EXCHANGE ACT OF 1934

                  For the Quarterly Period Ended June 30, 2007

                                       OR

                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
      -------          THE SECURITIES EXCHANGE ACT OF 1934

               For the Transition Period from _________to_________

                               Commission File No.
                                     0-25933

                        SOUTHCOAST FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

              South Carolina                          28-2384011
       (State or other jurisdiction                (I.R.S. Employer
    of incorporation or organization)            Identification No.)

                           530 Johnnie Dodds Boulevard
                       Mt. Pleasant, South Carolina 29464
                    (Address of principal executive offices)
                                   (Zip Code)
                                  843-884-0504
              (Registrant's telephone number, including area code)
              ----------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.

                                 YES [X]  NO [ ]


Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer.  See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]  Accelerated filer [X]  Non-accelerated filer  [  ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                                 YES [ ]  NO [X]


State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date.

       5,473,718 shares of common stock, no par value, as of July 31, 2007





<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION

                                      INDEX

<TABLE>
<CAPTION>

PART I - FINANCIAL INFORMATION                                                                                     Page No.
                                                                                                                   --------

Item 1.  Financial Statements (Unaudited)

<S>                                                                                                                 <C>
         Condensed Consolidated Balance Sheets - June 30, 2007 and December 31, 2006....................................2

         Condensed Consolidated Statements of Income - Six months ended June 30, 2007 and 2006..........................3

         Condensed Consolidated Statements of Income - Three months ended June 30, 2007 and 2006........................4

         Condensed Consolidated Statements of Shareholders' Equity and Comprehensive Income -
           Six months ended June 30, 2007 and 2006......................................................................5

         Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2007 and 2006......................6

Notes to Condensed Consolidated Financial Statements..................................................................7-9

Forward Looking Statements.............................................................................................10

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......................11-19

Item 3.  Quantitative and Qualitative Disclosures About Market Risk....................................................19

Item 4.  Controls and Procedures.......................................................................................19

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds...................................................20

Item 4.  Submission of Matters to a vote of Security Holders...........................................................20

Item 6.  Exhibits......................................................................................................20

Signatures ............................................................................................................21
</TABLE>




<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                      Condensed Consolidated Balance Sheets


PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements
<TABLE>
<CAPTION>
                                                                                                   June 30,          December 31,
                                                                                                     2007                2006
                                                                                                     ----                ----
                                                                                                  (Unaudited)
Assets
   Cash and cash equivalents:
<S>                                                                                              <C>                  <C>
     Cash and due from banks .............................................................       $   8,816,514        $   7,008,202
     Federal funds sold ..................................................................           1,162,000           31,204,000
                                                                                                 -------------        -------------
       Total cash and cash equivalents ...................................................           9,978,514           38,212,202

   Investment securities
     Available for sale ..................................................................          55,552,789           42,577,683
     Federal Home Loan Bank Stock, at cost ...............................................           4,231,700            3,882,800
                                                                                                 -------------        -------------
       Total investment securities .......................................................          59,784,489           46,460,483

   Loans held for sale ...................................................................             347,000              139,516

   Loans, net of allowance of $4,315,078 and $4,364,127 ..................................         368,024,839          363,246,406

   Property and equipment, net ...........................................................          25,653,077           25,125,834
   Bank Owned Life Insurance .............................................................          17,507,401            2,631,881
   Other assets ..........................................................................           6,408,584            6,039,218
                                                                                                 -------------        -------------
       Total assets ......................................................................       $ 487,703,904        $ 481,855,540
                                                                                                 =============        =============

Liabilities
   Deposits
     Noninterest-bearing .................................................................       $  36,624,791        $  34,693,747
     Interest bearing ....................................................................         272,027,048          276,198,958
                                                                                                 -------------        -------------
       Total deposits ....................................................................         308,651,839          310,892,705

   Securities sold under agreements to repurchase ........................................          10,423,997            1,840,719
   Other borrowings ......................................................................          75,500,000           66,000,000
   Junior subordinated debentures ........................................................          21,655,000           21,655,000
   Other liabilities .....................................................................           2,528,129            2,664,504
                                                                                                 -------------        -------------
       Total liabilities .................................................................         418,758,965          403,052,928
                                                                                                 -------------        -------------
Shareholders' Equity
   Common stock (no par value;  20,000,000 shares  authorized; 5,476,447 shares
     outstanding at June 30, 2007 and 6,017,348 at December 31, 2006) ....................          68,634,917           75,315,774
   Retained earnings .....................................................................             864,032            3,503,162
   Accumulated other comprehensive loss ..................................................            (554,010)             (16,324)
                                                                                                 -------------        -------------
       Total shareholders' equity ........................................................          68,944,939           78,802,612
                                                                                                 -------------        -------------
       Total liabilities and shareholders' equity ........................................       $ 487,703,904        $ 481,855,540
                                                                                                 =============        =============
</TABLE>

            See notes to condensed consolidated financial statements.



                                       2
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                                                     For the Six Months Ended
                                                                                                             June 30,
                                                                                                             --------
                                                                                                    2007                   2006
                                                                                                    ----                   ----
Interest income
<S>                                                                                             <C>                      <C>
   Loans, including fees .........................................................              $14,222,400              $13,751,594
   Investment securities .........................................................                1,206,318                1,195,322
   Federal funds sold ............................................................                  296,901                  262,864
                                                                                                -----------              -----------
       Total interest income .....................................................               15,725,619               15,209,780
                                                                                                -----------              -----------
Interest expense
   Deposits and borrowings .......................................................                8,361,191                6,964,227
                                                                                                -----------              -----------
Net interest income ..............................................................                7,364,428                8,245,553
Provision for loan losses ........................................................                        -                  624,883
                                                                                                -----------              -----------
Net interest income after provision for loan losses ..............................                7,364,428                7,620,670
                                                                                                -----------              -----------
Noninterest income
   Service fees on deposit accounts ..............................................                  489,384                  491,830
   Fees on loans sold ............................................................                  202,750                  155,216
   Gain on sale of available for sale securities .................................                   91,951                   39,095
   Gain on sale of premises and equipment ........................................                   25,016                  377,714
   Presales fee on property under sales contract .................................                        -                1,390,000
   Bank Owned Life Insurance earnings ............................................                  158,532                   50,012
   Other .........................................................................                  196,487                   72,555
                                                                                                -----------              -----------
       Total noninterest income ..................................................                1,164,120                2,576,422
                                                                                                -----------              -----------
Noninterest expenses
   Salaries and employment benefits ..............................................                3,423,418                3,423,522
   Occupancy .....................................................................                  537,627                  391,043
   Furniture and equipment .......................................................                  567,250                  502,281
   Advertising and public relations ..............................................                   92,924                  165,304
   Professional fees .............................................................                  321,697                  180,701
   Travel and entertainment ......................................................                  143,557                  157,493
   Telephone, postage and supplies ...............................................                  223,373                  199,248
   Other operating expenses ......................................................                  653,733                  617,588
                                                                                                -----------              -----------
       Total noninterest expenses ................................................                5,963,579                5,637,180
                                                                                                -----------              -----------
Income before income taxes .......................................................                2,564,969                4,559,912
Income tax .......................................................................                  870,025                1,744,257
                                                                                                -----------              -----------
Net income .......................................................................              $ 1,694,944              $ 2,815,655
                                                                                                ===========              ===========
Basic net income per common share* ...............................................              $       .30              $       .47

Diluted net income per common share* .............................................              $       .30              $       .47

Weighted average shares outstanding*
   Basic .........................................................................                5,725,460                5,997,310
   Diluted .......................................................................                5,731,162                6,003,125
</TABLE>

*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2007 and 2006.

            See notes to condensed consolidated financial statements.


                                       3
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
                   Condensed Consolidated Statements of Income
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                    For the Three Months Ended
                                                                                                             June 30,
                                                                                                             --------
                                                                                                   2007                     2006
                                                                                                   ----                     ----
Interest income
<S>                                                                                              <C>                      <C>
   Loans, including fees .........................................................               $7,248,484               $7,017,972
   Investment securities .........................................................                  603,884                  754,967
   Federal funds sold ............................................................                   80,214                  157,673
                                                                                                 ----------               ----------
       Total interest income .....................................................                7,932,582                7,930,612
                                                                                                 ----------               ----------
Interest expense
   Deposits and borrowings .......................................................                4,209,591                3,711,193
                                                                                                 ----------               ----------
Net interest income ..............................................................                3,722,991                4,219,419
Provision for loan losses ........................................................                        -                  305,660
                                                                                                 ----------               ----------
Net interest income after provision for loan losses ..............................                3,722,991                3,913,759
                                                                                                 ----------               ----------
Noninterest income
   Service fees on deposit accounts ..............................................                  270,797                  246,401
   Fees on loans sold ............................................................                  104,390                   62,289
   Gain on sale of available for sale securities .................................                        -                    6,953
   Presales fee on property under sales contract .................................                        -                1,390,000
   Bank Owned Life Insurance Earnings ............................................                  134,059                   50,012
   Other .........................................................................                   52,389                   34,949
                                                                                                 ----------               ----------
       Total noninterest income ..................................................                  561,635                1,790,604
                                                                                                 ----------               ----------
Noninterest expenses
   Salaries and employment benefits ..............................................                1,695,064                1,946,188
   Occupancy .....................................................................                  270,696                  209,889
   Furniture and equipment .......................................................                  289,448                  295,591
   Advertising and public relations ..............................................                   32,954                   90,470
   Professional fees .............................................................                  145,442                  111,170
   Travel and entertainment ......................................................                   70,276                   93,460
   Telephone, postage, and supplies ..............................................                  109,768                  109,727
   Other operating expenses ......................................................                  381,043                  374,691
                                                                                                 ----------               ----------
       Total noninterest expenses ................................................                2,994,691                3,231,186
                                                                                                 ----------               ----------
Income before income taxes .......................................................                1,289,935                2,473,177
Income tax .......................................................................                  425,903                  993,934
                                                                                                 ----------               ----------
Net income .......................................................................               $  864,032               $1,479,243
                                                                                                 ==========               ==========
Basic net income per common share* ...............................................               $      .15               $      .25

Diluted net income per common share* .............................................               $      .15               $      .25

Weighted average shares outstanding*
   Basic .........................................................................                5,603,193                5,998,400
   Diluted .......................................................................                5,609,052                6,004,231
</TABLE>

*Share and per share  amounts  have been  adjusted  to give  effect to 10% stock
dividends issued in 2007 and 2006.

            See notes to condensed consolidated financial statements.


                                       4
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                 Condensed Consolidated Statement of Changes in
                  Shareholders' Equity and Comprehensive Income
                 For the six months ended June 30, 2007 and 2006
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          other
                                                            Common Stock                              comprehensive
                                                            ------------              Retained            income
                                                        Shares          Amount        earnings            (loss)            Total
                                                        ------          ------        --------            ------            -----
<S>                                                  <C>           <C>              <C>                  <C>            <C>
Balance, December 31, 2005 .....................     4,954,210     $ 70,267,702     $  3,300,753         $(253,910)     $73,314,545

   Net income for the period ...................                                       2,815,655                          2,815,655

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                          (590,538)        (590,538)
                                                                                                                        -----------

   Comprehensive income ........................                                                                          2,225,117

   Stock dividend ..............................       495,843        4,637,165       (4,637,165)                                 -

   Employee stock purchase plan ................         3,638           70,731                                              70,731

   Issuance of common stock ....................        12,826          273,835                                             273,835
                                                     ---------     ------------     ------------         ---------      -----------

Balance, June 30, 2006 .........................     5,466,517     $ 75,249,433     $  1,479,243         $(844,448)     $75,884,228
                                                     =========     ============     ============         =========      ===========

Balance, December 31, 2006 .....................     5,470,316     $ 75,315,774     $  3,503,162         $ (16,324)     $78,802,612

   Net income for the period ...................                                       1,694,944                          1,694,944

   Other comprehensive loss, net of tax
   Unrealized holding losses
     on securities available for sale ..........                                                          (537,686)        (537,686)
                                                                                                                        -----------

   Comprehensive income ........................                                                                          1,157,258

   Stock dividend ..............................       502,609        4,334,074       (4,334,074)                                 -

   Shares repurchased and retired ..............      (499,718)     (11,079,592)                                        (11,079,592)

   Employee stock purchase plan ................         3,240           64,661                                              64,661
                                                     ---------     ------------     ------------          --------      -----------

Balance, June 30, 2007 .........................     5,476,447     $ 68,634,917     $    864,032         $(554,010)     $68,944,939
                                                     =========     ============     ============         =========      ===========
</TABLE>


            See notes to condensed consolidated financial statements.




                                       5
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                       For the six months ended
                                                                                                               June 30,
                                                                                                               --------
                                                                                                       2007                 2006
                                                                                                       ----                 ----
Operating activities
<S>                                                                                               <C>                  <C>
   Net income ............................................................................        $  1,694,944         $  2,815,655
   Adjustments to reconcile net income to net
   cash provided (used) by operating activities
       Decrease in deferred income taxes .................................................             254,011            1,081,161
       Provision for loan losses .........................................................                   -              624,883
       Depreciation and amortization .....................................................             684,516              406,848
       Discount accretion and premium amortization .......................................               3,666              (15,029)
       Gain on sale of securities ........................................................             (91,951)             (39,095)
       Gain on sale of property and equipment ............................................             (25,016)            (377,714)
       Originations of loans held for sale ...............................................         (32,085,429)         (54,133,888)
       Proceeds from sales of loans held for sale ........................................          31,877,945           61,744,446
       (Increase) decrease in value of Bank Owned Life Insurance .........................            (158,532)              11,803
       Increase in other assets ..........................................................            (320,930)            (836,914)
       Decrease in other liabilities .....................................................            (136,375)            (451,391)
                                                                                                  ------------         ------------

         Net cash provided by operating activities .......................................           1,696,849           10,830,765
                                                                                                  ------------         ------------

Investing activities
   Purchases of Federal Home Loan Bank stock .............................................            (348,900)            (207,700)
   Purchases of investment securities available-for-sale .................................         (19,314,414)         (52,828,634)
   Sales, calls, and maturities of investment securities available-for-sale ..............           5,587,460           17,306,990
   Purchases of Bank Owned Life Insurance ................................................         (14,716,988)                   -
   Proceeds from sales of premises and equipment .........................................              34,000            1,672,504
   Purchases of premises and equipment ...................................................          (1,220,743)          (2,986,332)
   Net increase in loans .................................................................          (4,778,433)         (15,507,426)
                                                                                                  ------------         ------------

         Net cash used for investing activities ..........................................         (34,758,018)         (52,550,598)
                                                                                                  ------------         ------------

Financing activities
   Increase in borrowings ................................................................          18,083,278            7,601,687
   Proceeds from issuances of stock ......................................................              64,661              344,566
   Funds used to repurchase stock ........................................................         (11,079,592)                   -
   Net increase (decrease) in deposits ...................................................          (2,240,866)          28,263,105
                                                                                                  ------------         ------------

         Net cash provided by financing activities .......................................           4,827,481           36,209,358
                                                                                                  ------------         ------------

         Decrease in cash and cash equivalents ...........................................         (28,233,688)          (5,510,475)

Cash and cash equivalents, beginning of period ...........................................          38,212,202           31,341,737
                                                                                                  ------------         ------------

Cash and cash equivalents, end of period .................................................        $  9,978,514         $ 25,831,262
                                                                                                  ============         ============

Cash paid during the year for:
   Income taxes ..........................................................................        $    916,715         $  1,552,111

   Interest ..............................................................................        $  8,079,235         $  6,649,329
</TABLE>


            See notes to condensed consolidated financial statements.


                                       6
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance
with accounting  principles  generally  accepted in the United States of America
for interim  financial  information  and with the  instructions to Form 10-Q and
Regulation S-X of the Securities and Exchange  Commission.  Accordingly  they do
not include all information and notes required by generally accepted  accounting
principles for complete financial statements.  However, in management's opinion,
all  adjustments   (consisting  of  normal  recurring  adjustments)   considered
necessary for a fair presentation have been included.

Note 2 - Organization

Southcoast Financial Corporation (the "Company") is a South Carolina corporation
organized  in 1999 for the  purpose of being a holding  company  for  Southcoast
Community Bank (the "Bank").  On April 29, 1999,  pursuant to a Plan of Exchange
approved by the shareholders,  all of the outstanding shares of capital stock of
the Bank were  exchanged for shares of common stock of the Company.  The Company
presently  engages in no business other than that of owning the Bank and another
subsidiary and has no employees.

Note 3 - Net Income Per Share

Net income per share is computed on the basis of the weighted  average number of
common shares  outstanding in accordance with Statement of Financial  Accounting
Standards No. 128,  "Earnings  per Share." The treasury  stock method is used to
compute the effect of stock  options on the  weighted  average  number of shares
outstanding for diluted earnings per share.

In May 2007 and April 2006, the Company  declared ten percent stock dividends on
the Company's  common stock. The weighted average number of shares and all other
share data has been  restated for all periods  presented to reflect  these stock
dividends.

Note 4 - Recently Issued Accounting Standards

The  following  is a summary  of recent  authoritative  pronouncements  that may
affect  accounting,  reporting,  and disclosure of financial  information by the
Company:

In February  2006, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  ("SFAS")  No. 155,  "Accounting  for Certain
Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140."
This Statement amends SFAS No. 133,  "Accounting for Derivative  Instruments and
Hedging  Activities," and SFAS No. 140,  "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement resolves
issues addressed in SFAS No. 133  Implementation  Issue No. D1,  "Application of
Statement 133 to Beneficial Interests in Securitized  Financial Assets." FAS 155
permits  fair value  re-measurement  for any hybrid  financial  instrument  that
contains  an embedded  derivative  that  otherwise  would  require  bifurcation,
clarifies which interest  only-strips and principal-only  strips are not subject
to the  requirements  of Statement  133,  establishes a requirement  to evaluate
interests  in  securitized  financial  assets  to  identify  interests  that are
freestanding  derivatives or that are hybrid financial  instruments that contain
an embedded derivative requiring  bifurcation,  clarifies that concentrations of
credit  risk in the form of  subordination  are not  embedded  derivatives,  and
amends  Statement  140 to eliminate  the  prohibition  on a  qualifying  special
purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial  instruments acquired or issued after January
1, 2007.  The Company  does not believe  that the  adoption of SFAS No. 155 will
have a material impact on its financial position,  results of operations or cash
flows.



                                       7
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards- (continued)

In March  2006,  the FASB  issued SFAS No. 156,  "Accounting  for  Servicing  of
Financial Assets--an amendment of FASB Statement No. 140." This Statement amends
FASB No. 140,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  with respect to the accounting for separately
recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an
entity to  recognize  a  servicing  asset or  servicing  liability  each time it
undertakes  an  obligation  to  service a  financial  asset by  entering  into a
servicing  contract;  requires all separately  recognized  servicing  assets and
servicing  liabilities to be initially  measured at fair value,  if practicable;
permits an entity to choose its subsequent measurement methods for each class of
separately recognized servicing assets and servicing liabilities; at its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in
some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value;  and requires  separate  presentation of servicing assets
and servicing  liabilities  subsequently measured at fair value in the statement
of financial position and additional  disclosures for all separately  recognized
servicing assets and servicing liabilities.  The required adoption date for SFAS
No. 156 is January 1, 2007.  The Company  does not believe the  adoption of SFAS
No.  156 will have a  material  impact on its  financial  position,  results  of
operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for   Uncertainty  in  Income  Taxes."  FIN  48  clarifies  the  accounting  for
uncertainty in income taxes recognized in enterprises'  financial  statements in
accordance  with FASB Statement No. 109,  "Accounting  for Income Taxes." FIN 48
prescribes  a  recognition  threshold  and  measurement   attributable  for  the
financial  statement  recognition  and  measurement  of a tax position  taken or
expected  to be  taken  in a tax  return.  FIN  48  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods,  disclosures  and  transitions.  FIN 48 is  effective  for fiscal years
beginning after December 15, 2006. The Company does not believe that FIN 48 will
have a material impact on its financial position,  results of operations or cash
flows.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value,  establishes  a framework  for  measuring  fair value in
generally accepted  accounting  principles,  and expands  disclosures about fair
value  measurements.   This  standard  does  not  require  any  new  fair  value
measurements,  but rather  eliminates  inconsistencies  found in  various  prior
pronouncements.  SFAS 157 is  effective  for the  Company on January 1, 2008 and
will not impact the  Company's  accounting  measurements  but it is  expected to
result in some additional disclosures.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined  Benefit  Pension and Other  Postretirement  Plans" ("SFAS 158"),  which
amends  SFAS  87 and  SFAS  106 to  require  recognition  of the  overfunded  or
underfunded  status of pension  and other  postretirement  benefit  plans on the
balance  sheet.  Under  SFAS 158,  gains and  losses,  prior  service  costs and
credits,  and any remaining  transition  amounts under SFAS 87 and SFAS 106 that
have  not  yet  been  recognized  through  net  periodic  benefit  cost  will be
recognized in accumulated other comprehensive income, net of tax effects,  until
they are amortized as a component of net periodic cost. The  measurement  date -
the date at which the  benefit  obligation  and plan  assets  are  measured - is
required  to be the  company's  fiscal  year  end.  SFAS  158 is  effective  for
publicly-held  companies for fiscal years ending after December 15, 2006, except
for the measurement date provisions, which are effective for fiscal years ending
after  December 15, 2008.  The Company does not have a defined  benefit  pension
plan.  Therefore,  SFAS 158 will not impact the Company's financial condition or
results of operations.

In  September,  2006,  The FASB ratified the  consensuses  reached by the FASB's
Emerging  Issues Task Force ("EITF")  relating to EITF 06-4  "Accounting for the
Deferred   Compensation  and  Postretirement   Benefit  Aspects  of  Endorsement
Split-Dollar  Life  Insurance   Arrangements".   EITF  06-4  addresses  employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability  for future  benefits in accordance  with SFAS No. 106,  "Employers'
Accounting  for  Postretirement  Benefits  Other Than  Pensions",  or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus  Opinion--1967".  EITF 06-4 is
effective for fiscal years  beginning  after December 15, 2006.  Entities should
recognize  the effects of  applying  this Issue  through  either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other  components  of equity or net assets in the  statement  of financial
position  as of the  beginning  of the  year  of  adoption  or (b) a  change  in
accounting principle through retrospective application to all prior periods. The
Company does not believe the  adoption of EITF 06-4 will have a material  impact
on its financial position, results of operations and cash flows.

                                       8
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

Note 4 - Recently Issued Accounting Standards (continued)

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life  Insurance--Determining  the Amount That Could
Be Realized in Accordance with FASB Technical Bulletin No. 85-4,  Accounting for
Purchases  of Life  Insurance."  EITF 06-5  states  that a  policyholder  should
consider  any  additional  amounts  included  in the  contractual  terms  of the
insurance  policy other than the cash surrender  value in determining the amount
that could be realized under the insurance contract.  EITF 06-5 also states that
a policyholder should determine the amount that could be realized under the life
insurance   contract   assuming   the   surrender  of  an   individual-life   by
individual-life  policy (or certificate by certificate in a group policy).  EITF
06-5 is  effective  for fiscal years  beginning  after  December  15, 2006.  The
Company does not believe the  adoption of EITF 06-5 will have a material  impact
on its financial position, results of operations and cash flows.

In December  2006,  the FASB issued a Staff  Position  ("FSP") on EITF  00-19-2,
"Accounting for Registration  Payment  Arrangements" ("FSP EITF 00-19-2").  This
FSP  specifies  that  the  contingent  obligation  to make  future  payments  or
otherwise  transfer  consideration  under a  registration  payment  arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement,  should be separately  recognized and measured in
accordance with SFAS No. 5, "Accounting for  Contingencies."  If the transfer of
consideration  under a registration  payment  arrangement is probable and can be
reasonably   estimated  at  inception,   the  contingent   liability  under  the
registration  payment arrangement is included in the allocation of proceeds from
the related financing  transaction (or recorded subsequent to the inception of a
prior financing  transaction) using the measurement guidance in SFAS No. 5. This
FSP is effective  immediately  for  registration  payment  arrangements  and the
financial  instruments  subject to those  arrangements  that are entered into or
modified subsequent to the issuance of the FSP. For prior arrangements,  the FSP
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2006 and interim  periods within those years.  The Company does not
believe the  adoption of this FSP will have a material  impact on its  financial
position, results of operations and cash flows.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial  Assets and  Financial  Liabilities  - Including  an amendment of FASB
Statement No. 115." This statement  permits,  but does not require,  entities to
measure many financial  instruments  at fair value.  The objective is to provide
entities with an opportunity to mitigate  volatility in reported earnings caused
by measuring related assets and liabilities  differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the  entity  first  recognizes  an  eligible  instrument  and  will  report
unrealized  gains and  losses on such  instruments  in  current  earnings.  This
statement 1) applies to all entities,  2) specifies  certain  election dates, 3)
can be applied on an instrument-by-instrument  basis with some exceptions, 4) is
irrevocable and 5) applies only to entire  instruments.  One exception is demand
deposit  liabilities which are explicitly excluded as qualifying for fair value.
With respect to SFAS 115,  available-for-sale and held-to-maturity securities at
the  effective  date are eligible for the fair value option at that date. If the
fair  value  option is  elected  for those  securities  at the  effective  date,
cumulative  unrealized  gains and losses at that date shall be  included  in the
cumulative-effect  adjustment and thereafter,  such securities will be accounted
for as trading  securities.  SFAS 159 is effective for the Company on January 1,
2008.  The  Company  is  currently  analyzing  the  fair  value  option  that is
permitted, but not required, under SFAS 159.

Other  accounting  standards  that have been  issued or  proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.

Note 5 - Commitments and Contingencies

In May 2006 the  Company  entered  into a sales  contract on two parcels of land
contiguous to its branch location on John's Island. The land has a cost basis of
$2,837,178.  Under the agreement the Company agreed to sell the land, comprising
approximately  13.21 acres,  to the  purchaser  for the sum of  $5,735,000.  The
agreement specifies a closing date on or before September 30, 2007, which can be
extended  for a cost of $15,000  per month  through  December  31,  2007.  These
monthly  payments are  nonrefundable  and not applicable to the purchase  price.
After  December  31,  2007,  the buyer may further  extend the  closing  through
December 31, 2008, by making  monthly  payments of $30,000.  Half of the monthly
extension  cost would be applicable to the purchase  price and half would not be
applicable.  The purchaser also paid the Company a nonrefundable presales fee of
$1,390,000 that is not applicable to the purchase price. The Company  recognized
the presales fee as an item of noninterest income during 2006.



                                       9
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                           FORWARD LOOKING STATEMENTS

This Report on Form 10-Q may contain forward-looking statements relating to such
matters as anticipated financial performance, business prospects,  technological
developments,  new products and similar  matters.  All  statements  that are not
historical  facts  are  "forward-looking  statements."  The  Private  Securities
Litigation  Reform  Act of  1995  provides  a safe  harbor  for  forward-looking
statements.  In order to comply with terms of the safe harbor, the Company notes
that a  variety  of  factors  could  cause  the  Company's  actual  results  and
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations   expressed   in   the   Company's   forward-looking    statements.
Forward-looking  statements  include  statements  with  respect to  management's
beliefs, plans, objectives,  goals,  expectations,  anticipations,  assumptions,
estimates,  intentions,  and future  performance,  and involve known and unknown
risks,  uncertainties  and other  factors,  which may be  beyond  the  Company's
control,  and which may cause actual results,  performance or achievements to be
materially different from future results,  performance or achievements expressed
or  implied  by such  forward-looking  statements.  All  statements  other  than
statements  of  historical  fact are  statements  that could be  forward-looking
statements.  These  forward-looking  statements can be identified through use of
words  such as "may,"  "will,"  "anticipate,"  "assume,"  "should,"  "indicate,"
"would," "believe,"  "contemplate,"  "expect," "seek,"  "estimate,"  "continue,"
"plan,"  "point  to,"  "project,"   "predict,"   "could,"  "intend,"   "target,"
"potential,"  and other  similar  words and  expressions  of the  future.  These
forward-looking  statements  may not be  realized  due to a variety of  factors,
including, without limitation:

     o    future economic and business conditions;
     o    lack of  sustained  growth in the  economies of the  Company's  market
          areas;
     o    government monetary and fiscal policies;
     o    the  effects of changes in interest  rates on the levels,  composition
          and costs of deposits, loan demand, and the values of loan collateral,
          securities, and interest sensitive assets and liabilities;
     o    the effects of  competition  from a wide  variety of local,  regional,
          national and other providers of financial,  investment,  and insurance
          services;
     o    credit risks;
     o    the failure of assumptions  underlying the  establishment of allowance
          for loan losses and other estimates;
     o    the risks of opening new offices,  including,  without limitation, the
          related  costs  and  time  of  building  customer   relationships  and
          integrating  operations as part of these  endeavors and the failure to
          achieve  expected  gains,  revenue growth and/or expense  savings from
          such endeavors;
     o    changes in laws and regulations, including tax, banking and securities
          laws and regulations;
     o    changes in accounting policies, rules and practices;
     o    changes in technology or products may be more difficult or costly,  or
          less effective than anticipated;
     o    the  effects of war or other  conflicts,  acts of  terrorism  or other
          catastrophic  events that may affect general  economic  conditions and
          economic confidence; and
     o    other  factors  and  information  described  in this report and in any
          other reports that we file with the Securities and Exchange Commission
          under the Securities Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this
cautionary  notice.  The Company has no  obligation  and does not  undertake  to
update,  revise or correct any of the forward-looking  statements after the date
of this  report.  The  Company  has  expressed  its  expectations,  beliefs  and
projections  in good faith and believes they have a reasonable  basis.  However,
there is no  assurance  that these  expectations,  beliefs or  projections  will
result or be achieved or accomplished.



                                       10
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations

The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and related notes  appearing  herein and in the Company's
Annual  Report on Form 10-K for the year ended  December  31,  2006.  Results of
operations for the period ending June 30, 2007 are not necessarily indicative of
the results to be attained for any other period. All share and per share data in
this discussion has been adjusted to reflect the 10% stock dividends declared in
May 2007 and April 2006.

Results of Operations

The Company's net income for the six months ended June 30, 2007 was  $1,694,944,
or $.30 per basic share, compared to $2,815,655 or $.47 per basic share, for the
six months ended June 30, 2006.  The average number of shares for the six months
ending June 30, 2007 was  5,725,460  compared  to  5,997,310  for the six months
ending June 30, 2006.

The  Company's  net income for the three months ended June 30, 2007 was $864,032
or $.15 per basic share, compared to $1,479,243 or $.25 per basic share, for the
three months ended June 30, 2006.  The average  number of shares for the quarter
ending June 30, 2007 was 5,603,193  compared to 5,998,400 for the quarter ending
June 30, 2006.

Net Interest Income

Net interest  income is the difference  between the interest  earned on interest
earning assets and the interest paid for funds acquired to support those assets,
and is the principal source of the Company's  earnings.  Net interest income was
$7,364,428  for the six months ended June 30, 2007,  compared to $8,245,553  for
the six months ended June 30, 2006.

Changes  that affect net  interest  income  include  changes in the average rate
earned on interest earning assets,  changes in the average rate paid on interest
bearing  liabilities,  and changes in the volumes of interest earning assets and
interest bearing liabilities.

Average  earning  assets for the six months  ending June 30, 2007  decreased 3.1
percent to $427.4  million from the $441.2  million  reported for the six months
ending June 30, 2006.  The decrease was mainly  attributable  to a $13.3 million
decrease in average loans.  This decrease in average loans was driven by a $34.5
million decrease in average wholesale loans, the result of management's decision
to  focus  on  internally  generated  lending.   Average  internally  generated,
non-wholesale  loans  increased by $21.2 million due to the continued  growth of
the  Charleston  market area, the expansion of the Company's  branches,  and the
Company's marketing efforts.

Average  interest  bearing  liabilities  for the six months  ended June 30, 2007
increased 1.1 percent to $362.3 million from the $358.4 million reported for the
six months  ending  June 30,  2006.  The  increase  was mainly  attributable  to
increases in average other borrowings, primarily Federal Home Loan Bank Advances
and  Repurchase  Agreements,  of $25.2  million,  and  savings  and  transaction
accounts of $10.9 million, offset by a decrease of $32.2 million in average time
deposits.  Of this decrease,  $23.9 million was  attributable  to a reduction in
average wholesale and brokered time deposits.  The remaining decrease in average
time deposits was due to a competitive  rate market for time deposits  resulting
from economic  conditions and increased  competition for time deposits driven by
several new competitors in our market area.

The  following  table  compares the average  balances,  yields and rates for the
interest  sensitive  segments of the Company's balance sheets for the six months
ended June 30, 2007 and 2006.




                                       11
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Net Interest Income - continued
<TABLE>
<CAPTION>
                                                          For the six months ended                    For the six months ended
                                                               June 30, 2007                               June 30, 2006
                                                               -------------                               -------------
                                                  Average         Income/       Yield/        Average          Income/        Yield/
                                                  Balance         Expense       Rate(1)       Balance          Expense       Rate(1)
                                                  -------         -------       -------       -------          -------       -------
Assets
<S>                                         <C>                 <C>               <C>     <C>                <C>               <C>
   Federal funds sold ..................    $   11,315,365      $   296,901       5.29%   $  11,454,497      $   262,864       4.63%
   Investments - taxable ...............        42,500,336        1,071,830       5.09       46,410,441        1,134,386       4.93
   Investments - nontaxable (2) ........         6,541,727          210,138       6.48        3,033,995           95,213       6.33
                                            --------------      -----------               -------------      -----------
     Total investments and
       federal funds sold ..............        60,357,428        1,578,869       5.28       60,898,933        1,492,463       4.94
   Loans (3) (4) .......................       367,028,261       14,222,400       7.78      380,302,156       13,751,594       7.29
                                            --------------      -----------               -------------      -----------
     Total earning assets ..............       427,385,689       15,801,269       7.42%     441,201,089       15,244,057       6.97
                                                                -----------                                  -----------
     Other assets ......................        45,951,641                                   35,938,137
                                            --------------                                -------------
     Total assets ......................    $  473,337,330                                $ 477,139,226
                                            ==============                                =============
Liabilities
   Savings and
     transaction accounts ..............    $   63,966,053          853,621       2.69    $  53,070,321      $   429,713       1.63
   Time Deposits .......................       192,197,814        4,776,430       5.01      224,372,831        4,601,607       4.14
   Other borrowings ....................        84,520,744        1,900,584       4.53       59,290,240        1,162,171       3.95
   Subordinated Debt ...................        21,655,000          830,556       7.73       21,655,000          770,736       7.18
                                            --------------      -----------               -------------      -----------
     Total interest bearing
       liabilities .....................       362,339,611        8,361,191       4.65      358,388,392        6,964,227       3.92
                                                                -----------                                  -----------
   Non-interest bearing
     liabilities .......................        37,123,942                                   44,151,448
                                            --------------                                -------------
     Total liabilities .................       399,463,553        8,361,191       4.22      402,539,840        6,964,227       3.49
                                                                -----------                                  -----------
   Equity ..............................        73,873,777                                   74,599,386
                                            --------------                                -------------
     Total liabilities
       and equity ......................    $  473,337,330                                $ 477,139,226
                                            ==============                                =============
     Net interest
       income/margin (5) ...............                        $ 7,440,078       3.48                       $ 8,279,830       3.78
                                                                ===========                                  ===========
     Net interest spread (6) ...........                                          2.77%                                        3.05%
</TABLE>

(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans.
(4)  Income includes loan fees of $579,044 in 2007 and $719,810 in 2006.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.

As shown  above,  for the six months  ended June 30, 2007 the  average  yield on
earning  assets was 7.42  percent,  while the average  cost of interest  bearing
liabilities was 4.65 percent. For the six months ended June 30, 2006 the average
yield  on  earning   assets  was  6.97   percent   and  the   average   cost  of
interest-bearing  liabilities  was 3.92  percent.  The  increase in the yield on
earning assets and the rates paid on interest bearing  liabilities is due to the
market  interest rate increases  over the last year. The net interest  margin is
computed by  annualizing  year to date  interest  income and  interest  expense,
taking the  difference,  and dividing the resulting  figure by average  interest
earning  assets.  The net interest margin for the six months ended June 30, 2007
was 3.48  percent  compared to 3.78  percent  for the six months  ended June 30,
2006.  The decrease in the net interest  margin is primarily  attributable  to a
decrease in average  earning  assets of $13.8  million  between the two periods,
coupled with a 73 basis point increase in rates paid on average interest bearing
liabilities,  compared to a 45 basis point increase in rates on average interest
earning  assets.  The cost of total  liabilities was 4.22 percent for the period
ending June 30, 2007  compared  to 3.49  percent for the period  ending June 30,
2006.


                                       12
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Net  Interest  Income -  continued

Average  earning assets for the three months ending June 30, 2007 decreased 6.68
percent to $422.6 million from the $452.8 million  reported for the three months
ending June 30, 2006.  The decrease was primarily  attributable  to decreases of
$12.3 million in investments and $10.7 million in loans. The decrease in average
loans  was  driven by a $33.5  million  decrease  in  average  wholesale  loans,
partially offset by an increase of $22.8 million in core retail loans.

Average interest  bearing  liabilities for the three months ending June 30, 2007
decreased 0.37 percent to $365.0  million from the $366.3  million  reported for
the three  months  ending June 30,  2006.  The  decrease was due to increases of
$18.1 million and $25.6 million in savings and transaction  accounts,  and other
borrowings,  respectively, offset by a decrease of $45.1 million in average time
deposits.  Average  wholesale  and brokered  time  deposits  accounted for $37.1
million of this decrease.

The  following  table  compares the average  balances,  yields and rates for the
interest sensitive segments of the Company's balance sheets for the three months
ended June 30, 2007 and 2006.

<TABLE>
<CAPTION>
                                                     For the three months ended                    For the three months ended
                                                             June 30, 2007                               June 30, 2006
                                                             -------------                               -------------
                                               Average          Income/      Yield/          Average          Income/        Yield/
                                               Balance          Expense      Rate(1)         Balance          Expense        Rate(1)
                                               -------          -------      -------         -------          -------        -------
Assets
<S>                                       <C>                <C>               <C>       <C>                <C>               <C>
   Federal funds sold ..................  $   6,147,130      $    80,214       5.23%     $  13,364,638      $   157,673       4.73%
   Investments - taxable ...............     42,524,032          530,292       5.00         58,121,441          716,885       4.95
   Investments - nontaxable (2) ........      7,050,258          114,988       6.54          3,764,707           59,503       6.34
                                          -------------      -----------                 -------------      -----------
     Total investments and
       federal funds sold ..............     55,721,420          725,494       5.22         75,250,786          934,061       4.98
   Loans (3) (4) .......................    366,850,110        7,248,484       7.89        377,559,922        7,017,972       7.46
                                          -------------      -----------                 -------------      -----------
     Total earning assets ..............    422,571,530        7,973,978       7.54        452,810,708        7,952,033       7.04
                                                             -----------                                    -----------
     Other assets ......................     51,653,946                                     36,152,618
                                          -------------                                  -------------
     Total assets ......................  $ 474,225,476                                  $ 488,963,326
                                          =============                                  =============
Liabilities
   Savings and
     transaction accounts ..............  $  70,887,552      $   491,177       2.78      $  52,778,995      $   217,427       1.65
   Time Deposits .......................    183,281,702        2,302,896       5.04        228,355,607        2,445,266       4.30
   Other Borrowings ....................     89,177,687        1,000,148       4.50         63,558,511          649,695       4.10
   Subordinated Debt ...................     21,655,000          415,370       7.69         21,655,000          398,805       7.39
                                          -------------      -----------                 -------------      -----------
     Total interest bearing
       liabilities .....................    365,001,941        4,209,591       4.63        366,348,113        3,711,193       4.06
                                                             -----------                                    -----------
   Non-interest bearing
     liabilities .......................     37,513,150                                     47,377,155
                                          -------------                                  -------------
     Total liabilities .................    402,515,091        4,209,591       4.19        413,725,268        3,711,193       3.60
                                                             -----------                                    -----------
   Equity ..............................     71,710,385                                     75,238,058
                                          -------------                                  -------------
     Total liabilities
       and equity ......................  $ 474,225,476                                  $ 488,963,326
                                          =============                                  =============
     Net interest
       income/margin (5) ...............                     $ 3,764,387       3.54                         $ 4,240,840       3.76
                                                             ===========                                    ===========
     Net interest spread (6)                                                   2.91%                                          2.98%
</TABLE>
(1)  Annualized
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Does not include non- accruing loans.
(4)  Income includes loan fees of $333,906 in 2007 and $397,850 in 2006.
(5)  Net interest income divided by total earning assets.
(6)  Total interest earning assets yield less interest bearing liabilities rate.



                                       13
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations - continued

Net Interest  Income - continued

As reflected  above,  for the three months ended June 30, 2007 the average yield
on earning assets was 7.54 percent,  while the average cost of interest  bearing
liabilities  was 4.63  percent.  For the three  months  ended June 30,  2006 the
average  yield on  earning  assets  was 7.04  percent  and the  average  cost of
interest-bearing  liabilities  was 4.06  percent.  The  increase in the yield on
earning  assets  and  the  rates  paid  on  interest   bearing   liabilities  is
attributable  to the market  interest rate increases over the last year. The net
interest  margin  for the three  months  ended  June 30,  2007 was 3.54  percent
compared to 3.76 percent for the three months ended June 30, 2006.  The decrease
in the net interest  margin is primarily  attributable  to a decrease in average
earning assets of $30.2 million between the two periods, coupled with a 57 basis
point increase in rates paid on average interest bearing  liabilities,  compared
to only a 50 basis point increase in rates on average  interest  earning assets.
The cost of total  liabilities  was 4.19 percent for the three months ended June
30, 2007, compared to 3.60 percent for the three months ended June 30, 2006.

The following  tables present changes in the Company's net interest income which
are   primarily   a  result  of   changes   in  the  volume  and  rates  of  its
interest-earning assets and interest-bearing liabilities.

<TABLE>
<CAPTION>
                                                                                  Analysis of Changes in Net Interest Income
                                                                                    For the six months ended June 30, 2007
                                                                                   Versus six months ended June 30, 2006 (1)
                                                                                   -----------------------------------------
                                                                               Volume                 Rate               Net Change
                                                                               ------                 ----               ----------
Interest income:
<S>                                                                         <C>                   <C>                   <C>
   Federal funds sold ............................................          $    (3,193)          $    37,230           $    34,037
   Investments - taxable .........................................              (95,573)               33,017               (62,556)
   Investments - non taxable (2) .................................              110,079                 4,846               114,925
                                                                            -----------           -----------           -----------
     Total investments and federal funds sold ....................               11,313                75,093                86,406
     Net loans (3) ...............................................             (479,979)              950,785               470,806
                                                                            -----------           -----------           -----------
     Total interest income .......................................             (468,666)            1,025,878               557,212
                                                                            -----------           -----------           -----------
Interest expense:
   Savings and transaction accounts ..............................               43,869               380,039               423,908
   Time deposits .................................................             (328,112)              502,935               174,823
   Other borrowings ..............................................              245,910               492,503               738,413
   Subordinated debt .............................................                    -                59,820                59,820
                                                                            -----------           -----------           -----------
     Total interest expense ......................................              (38,333)            1,435,297             1,396,964
                                                                            -----------           -----------           -----------
     Net interest income .........................................          $  (430,333)          $  (409,419)          $  (839,752)
                                                                            ===========           ===========           ===========
</TABLE>
(1)  Changes in rate/volume have been allocated on a consistent basis to rate.
(2)  Tax equivalent yields for nontaxable investments assuming a 36% tax rate.
(3)  Income includes loan fees of $579,044 in 2007 and $719,810 in 2006.


                                       14
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Net Interest Income - continued
<TABLE>
<CAPTION>
                                                                                  Analysis of Changes in Net Interest Income
                                                                                    For the three months ended June 30, 2007
                                                                                 Versus three months ended June 30, 2006 (1)
                                                                                 -------------------------------------------
                                                                                Volume                 Rate               Net Change
                                                                                ------                 ----               ----------
Interest income:
<S>                                                                           <C>                   <C>                   <C>
   Federal funds sold ............................................            $ (84,215)            $   6,756             $ (77,459)
   Investments - taxable .........................................             (190,268)                3,675              (186,593)
   Investments - non taxable (2) .................................               51,359                 4,126                55,485
                                                                              ---------             ---------             ---------
     Total investments and federal funds sold ....................             (223,124)               14,557              (208,567)
     Net loans (3) ...............................................             (196,883)              427,395               230,512
                                                                              ---------             ---------             ---------
     Total interest income .......................................             (420,007)              441,952                21,945
                                                                              ---------             ---------             ---------
Interest expense:
   Savings and transaction accounts ..............................               73,780               199,970               273,750
   Time deposits .................................................             (477,354)              334,984              (142,370)
   Other borrowings ..............................................              259,001                91,452               350,453
   Subordinated debt .............................................                    -                16,565                16,565
                                                                              ---------             ---------             ---------
     Total interest expense ......................................             (144,573)              642,971               498,398
                                                                              ---------             ---------             ---------
     Net interest income .........................................            $(275,434)            $(201,019)            $(476,453)
                                                                              =========             =========             =========
</TABLE>

(1) Changes in rate/volume  have been  allocated on a consistent  basis to rate.
(2) Tax equivalent  yields for nontaxable  investments  assuming a 36% tax rate.
(3) Income includes loan fees of $333,906 in 2007 and $397,850 in 2006.

Noninterest Income and Expenses

Noninterest  income  for the six  months  ended  June 30,  2007  was  $1,164,120
compared to  $2,576,422  for the six months  ended June 30,  2006, a decrease of
$1,412,302.  Included in  noninterest  income for the six months  ended June 30,
2006 is a $1,390,000  presales fee on a parcel of our property  currently  under
contract to be sold in the fourth  quarter of 2007. The fee is not applicable to
the purchase price of the property in question and is nonrefundable in the event
the sale does not occur. Also included in noninterest  income for the six months
ended June 30,  2006 is a $377,714  gain on the sale of premises  and  equipment
related  to a sale of real  estate.  These  two  items of real  estate-  related
noninterest  income  totaled  $0 in  2007  and  $1,767,714  in  2006.  Partially
offsetting the decline in real estate-  related  noninterest  income between the
two periods are increases of $52,856 in gains on sales of investment  securities
and $108,520 in Bank Owned Life Insurance earnings for the six months ended June
30, 2007 when  compared to the six months ended June 30,  2006.  The increase in
Bank  Owned  Life  Insurance  earnings  between  the two  periods  was driven by
purchases  of $14.9  million  of Bank  Owned  Life  Insurance  during the second
quarter of 2007.  Additionally,  fees on loans sold increased by $47,534 between
the  two  periods  due  to  increased  mortgage  banking  activity,   and  other
noninterest income increased by $123,932 between the two periods,  primarily due
to an award of $125,000 from a lawsuit.

Although the Company has reported  income in a number of recent periods  related
to sales of excess real estate and may continue to do so in future periods,  the
number  and  amounts  of  such  transactions  are  likely  to be  irregular  and
shareholders  should not expect such  transactions  or resulting  income in each
future period.

Noninterest  expenses  for the six months  ended June 30, 2007 were  $5,963,579,
compared to $5,637,180  for the six months ended June 30, 2006.  The increase of
$326,399 is mainly  attributable  to increases in occupancy  and  furniture  and
fixture  expenses of $211,553 and increases of $140,996 for  professional  fees.
The increases in occupancy and furniture and fixture  expenses  primarily relate
to  expenditures  associated  with the Operations  Center placed into service in
March 2006, the Charlestowne Mortgage operation, acquired June 30, 2006, the Sam
Rittenberg  branch  location,  opened in January 2007,  and the Park West branch
location,  opened in April 2007.  The increase in  professional  fees relates to
expenses for loan review  consultants  incurred in 2007 but not 2006, as well as
additional  audit and legal  fees  related to the  Company's  status as a public
company and an  accelerated  filer subject to Section 404 of the Sarbanes  Oxley
Act of 2002.

                                       15
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
     Results of Operations - continued

Noninterest Income and Expenses - continued

Noninterest  income  for the three  months  ended  June 30,  2007 was  $561,635,
compared to $1,790,604 for the three months ended June 30, 2006. The decrease is
primarily  attributable  to  the  aforementioned  pre-sales  fee  of  $1,390,000
recognized in 2006, partially offset by an increase in Bank Owned Life Insurance
earnings of $84,047 between the two periods.

Noninterest  expenses for the three months ended June 30, 2007 were  $2,994,691,
compared to $3,231,186 for the three months ended June 30, 2006. The decrease of
$236,495 is mainly attributable to a $251,124 decrease in salaries and benefits.
The decrease in salaries  and  benefits was due to a $471,125  decrease in bonus
expense,  partially  offset by  increases  in salaries  and  benefits due to the
staffing needs of the new branch  locations and mortgage  operation,  as well as
salary adjustments.

Liquidity

Liquidity  is the  ability  to  meet  current  and  future  obligations  through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less certificates for $100,000 or more, wholesale and brokered deposits) provide
a relatively  stable  funding base, and were equal to 61.9% of total deposits as
of June 30, 2007.  Asset liquidity is provided from several  sources,  including
amounts due from banks and federal funds sold and funds from maturing loans. The
Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLBA") and, as such
has the  ability  to  borrow  against  a pledge  of its 1-4  family  residential
mortgage  loans.  The Company  also has a $15.4  million line of credit with the
Bankers Bank of Atlanta, a $10 million line of credit with First Tennessee Bank,
a $10 million line of credit with Nexity  Bank,  and a $5 million line of credit
with First  American  Bank.  Management  believes that the  Company's  liquidity
sources are adequate to meet normal operating needs.

Loans

Nonfarm, nonresidential real estate loans comprised 22 percent of the total loan
portfolio as of June 30, 2007,  totaling  $82.9  million.  Loans secured by real
estate for  construction  and land  development  totaled  $81.9  million,  or 22
percent of the portfolio  while 1-4 family mortgage loans totaled $158.8 million
or 43 percent of the total loan  portfolio,  as of June 30, 2007. All other real
estate  loans  totaled  $7.3  million or 2 percent of the total loan  portfolio.
Commercial and industrial  loans  comprised  $37.4 million,  or 10% of the total
loan  portfolio.  Installment  loans and  other  consumer  loans to  individuals
comprised $3.9 million or 1 percent of the total loan  portfolio.  The allowance
for loan losses was 1.16 percent of loans as of June 30, 2007,  compared to 1.19
percent as of December 31, 2006. In management's opinion, the allowance for loan
losses is adequate to absorb estimated losses inherent in the loan portfolio. At
June 30,  2007,  the Company had $1.2  million in loans 90 days  delinquent  and
still accruing interest and $1.9 million of nonaccrual loans. The Company had no
"other real estate owned" at this date. The majority of the  non-accruing  loans
are secured by real estate. The following table provides a year to date analysis
of activity within the allowance for loan losses:

Balance at December 31, 2006 .................................        $4,364,127
Current Year Loan Loss Provision .............................                 -
Charge- offs:
     Domestic:
       Commercial, financial, and agricultural ...............            60,899
       Installment loans to individuals ......................               399
     Foreign: ................................................                 -
Recoveries:
       Commercial, financial, and agricultural ...............            12,171
       Installment loans to individuals ......................                78
                                                                      ----------
Balance at June 30, 2007 .....................................        $4,315,078
                                                                      ==========


                                       16
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Deposits

Deposits  decreased  $2.2 million  during the first six months of 2007 to $308.7
million at June 30,  2007.  The decrease was  attributable  to several  factors.
Noninterest  bearing  deposits  increased  $1.9  million  and  interest  bearing
deposits  decreased  by $4.2  million  during  the  first  six  months  of 2007.
Certificates  of deposit from retail  customers  increased  approximately  $11.1
million  during  the  first  six  months,  largely  as  the  result  of  several
certificate of deposit rate specials  offered during the second quarter of 2007.
Savings and interest bearing transaction accounts increased  approximately $23.8
million  due to  competitive  rates and the  expansion  of our  branch  network.
Brokered and wholesale deposits decreased $39.1 million for the six months ended
June 30, 2007 as the Company  followed  its strategy of reducing its reliance on
wholesale funding.

Other Borrowings

Other   borrowings  are  comprised  of  FHLBA   advances.   FHLBA  Advances  are
collateralized  by pledged FHLBA stock and certain  residential  mortgage loans.
FHLBA advances are summarized as follows:

              Maturity                     Rate                   Balance
           -----------------               -----            ---------------
           June 2008                       5.40%            $     5,500,000
           November 2008                   5.50%                  2,000,000
           September 2010                  5.55%                  7,000,000
           February 2011                   5.36%                  4,500,000
           November 2011                   4.86%                  2,000,000
           March 2013                      2.91%                  7,500,000
           September 2013                  4.80%                 10,000,000
           June 2014                       3.92%                  2,000,000
           October 2016                    4.25%                  5,000,000
           October 2016                    4.17%                  5,000,000
           November 2016                   4.08%                  5,000,000
           January 2017                    4.35%                  5,000,000
           January 2017                    4.40%                  5,000,000
           January 2017                    4.46%                  5,000,000
           January 2017                    4.60%                  5,000,000
                                                            ---------------

           Balance                                          $    75,500,000
                                                            ===============

Junior Subordinated Debentures

 In two  separate  transactions  in 2002 and  another  transaction  in 2005,  we
established  Southcoast Capital Trusts I, II and III (the "Capital Trusts"),  as
non-consolidated  subsidiaries.  The Capital  Trusts  issued and sold a total of
21,655 floating rate securities,  with a $1,000 liquidation amount per security.
Institutional  buyers bought 21,000 of the floating rate securities  denominated
as preferred  securities  and we bought the other 655 floating  rate  securities
which are denominated as common  securities.  The proceeds of those sales, $21.7
million,  were  used by the  Capital  Trusts  to buy  $21.7  million  of  junior
subordinated  debentures from us which are reported on our consolidated  balance
sheets.  Our $655,000  investment in the common securities of the Capital Trusts
is included in "Other assets" on our consolidated  balance sheets. The preferred
securities  of the  Capital  Trusts  totaling  $21.7  million  qualify as Tier 1
capital under Federal Reserve Board guidelines, subject to limitations. See Note
11 to the  consolidated  financial  statements and the  information set forth in
Exhibit 13 under the caption "Management's  Discussion and Analysis of Financial
Condition and Results of  Operations- - Junior  Subordinated  Debentures"  filed
with our Form 10-K for the year ended  December 31, 2006,  for more  information
about the terms of the junior subordinated debentures.

On July 2, 2007, the Company retired the securities issued by Southcoast Capital
Trust I. The securities  totaled $4,125,000 and paid interest at a floating rate
of 3 month Libor + 375 basis points.


                                       17
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Capital Resources

The capital  base for the Company  decreased  by $9.9  million for the first six
months of 2007,  due to our  repurchase of 499,718 shares of common stock for an
aggregate  purchase  price of $11.1  million,  and other  comprehensive  loss of
$537,686,  offset by net income of $1,694,944 and proceeds from stock  issuances
of $64,661  through our Employee  Stock  Purchase  Plan.  The Company's tier one
capital to average  assets ratio was 19.33  percent as of June 30, 2007 compared
to 20.87 percent as of December 31, 2006.

The  Federal  Reserve  Board and other bank  regulatory  agencies  require  bank
holding  companies and financial  institutions  to maintain  capital at adequate
levels based on a percentage of assets and off-balance sheet exposures, adjusted
for risk weights ranging from 0% to 100%. Under the risk-based standard, capital
is  classified  into two tiers.  The Bank's  Tier 1 capital  consists  of common
shareholders'  equity minus certain  intangible assets plus junior  subordinated
debt subject to certain  limitations.  The Bank's Tier 2 capital consists of the
allowance for loan losses subject to certain  limitations  and the Bank's junior
subordinated debt in excess of 25% of the Bank's Tier 1 capital.  A bank holding
company's  qualifying  capital base for purposes of its risk-based capital ratio
consists  of the sum of its Tier 1 and Tier 2 capital.  The  regulatory  minimum
requirements are 4% for Tier 1 and 8% for total risk-based  capital.  Southcoast
and the Bank are also  required to maintain  capital at a minimum level based on
quarterly  average  assets,  which  is  known as the  leverage  ratio.  Only the
strongest  bank holding  companies and banks are allowed to maintain  capital at
the minimum requirement. All others are subject to maintaining ratios 100 to 200
basis points above the  minimum.  As of June 30, 2007,  the Company and the Bank
exceeded their capital requirements as shown in the following table.

<TABLE>
<CAPTION>
                                                                                        Capital Ratios
                                                                                        --------------
                                                                                       Well Capitalized    Adequately Capitalized
(Dollars in thousands)                                                  Actual            Requirement           Requirement
                                                                        ------            -----------           -----------
                                                                  Amount      Ratio     Amount      Ratio    Amount      Ratio
                                                                 ------      -----     ------      -----    ------      -----
The Bank
<S>                                                             <C>          <C>       <C>        <C>       <C>         <C>
  Total capital (to risk-weighted assets) ................      $56,202      16.04%    35,044     10.00%    28,035      8.00%
  Tier 1 capital (to risk-weighted assets) ...............       52,193      14.89%    21,026      6.00%    14,018      4.00%
  Tier 1 capital (to average assets) .....................       52,193      11.66%    22,382      5.00%    17,906      4.00%
The Company
  Total capital (to risk-weighted assets) ................      $95,422      25.24%       N/A       N/A     30,242      8.00%
  Tier 1 capital (to risk-weighted assets) ...............       91,107      24.10%       N/A       N/A     15,121      4.00%
  Tier 1 capital (to average assets) .....................       91,107      19.33%       N/A       N/A     18,856      4.00%
</TABLE>


                                       18
<PAGE>
                        SOUTHCOAST FINANCIAL CORPORATION

Item 2. -  Management's  Discussion  and  Analysis of  Financial  Condition  and
           Results of Operations - continued

Off Balance Sheet Risk

The Company makes  contractual  commitments  to extend credit and issues standby
letters  of credit in the  ordinary  course of its  business  activities.  These
commitments  are  legally  binding  agreements  to lend  money to  customers  at
predetermined  interest  rates for a  specified  period of time.  In addition to
commitments to extend credit,  the Company also issues standby letters of credit
which are  assurances  to a third  party that they will not suffer a loss if the
customer fails to meet a contractual  obligation to the third party. At June 30,
2007, the Company had issued  commitments  to extend credit of  $36,612,797  and
standby  letters of credit of  $1,275,913  through  various  types of commercial
lending arrangements.  Approximately  $32,440,302 of these commitments to extend
credit had variable rates.

The  following  table sets forth the  length of time until  maturity  for unused
commitments to extend credit and standby letters of credit at June 30, 2007.

<TABLE>
<CAPTION>
                                                                   After One    After Three
                                                                    Through       Through                   Greater
                                                    Within One       Three        Twelve     Within One      Than
                                                      Month         Months        Months        Year        One Year        Total
                                                      -----         ------        ------        ----        --------        -----
<S>                                                <C>           <C>           <C>           <C>           <C>           <C>
Unused commitments to extend credit ............   $ 2,911,897   $ 3,321,969   $17,722,540   $23,956,406   $12,656,391   $36,612,797
Standby letters of credit ......................             -       361,070       914,843     1,275,913             -     1,275,913
                                                   -----------   -----------   -----------   -----------   -----------   -----------
    Totals .....................................   $ 2,911,897   $ 3,683,039   $18,637,383   $25,232,319   $12,656,391   $37,888,710
                                                   ===========   ===========   ===========   ===========   ===========   ===========
</TABLE>

Based on historical  experience,  many of the  commitments and letters of credit
will expire unfunded.  Accordingly,  the amounts shown in the table above do not
necessarily reflect the Company's need for funds in the periods shown.  Further,
through its various sources of liquidity,  the Company  believes it will be able
to fund these  obligation as they arise.  The Company  evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed  necessary  upon  extension of credit,  is based on the company's  credit
evaluation  of  the  borrower.   Collateral  varies  but  may  include  accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.

Item 3. - Quantitative and Qualitative Disclosures About Market Risk.

Information  about the  Company's  exposure to market risk was  disclosed in its
Annual Report on Form 10-K for the year ended December 31, 2006, which was filed
with the Securities and Exchange  Commission on March 16, 2007.  There have been
no material  quantitative  or qualitative  changes in market risk exposure since
the date of that filing.

Item 4. - Controls and Procedures.

Based  on  the  evaluation  required  by 17  C.F.R.  Sections  240.13a-15(b)  or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Section 240.13a-15(e) and 240.15d-15(e), the Company's chief executive
officer and chief financial officer concluded that such controls and procedures,
as of the end of the period covered by this quarterly report, were effective.

There  has been no change  in the  Company's  internal  control  over  financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially  affect,  the Company's internal control over
financial reporting.


                                       19
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

PART II - OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

        (c) Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>
                                        (a) Total Number      (b) Average       (c) Total Number of           Maximum Number
                                             of Shares         Price Paid        Shares Purchased as     of Shares that May yet be
      Period                                Purchased          Per Share     Part of Publicly Announced     Purchased Under the
      ------                                                                      Plans or Programs (1)      Plans or Programs
                                        --------------         ---------          ---------------------      -----------------
<C>                                          <C>                 <C>                    <C>                      <C>
4/1/07-4/30/07 ..................             10,990             22.50                   10,990                  248,662
5/1/07-5/31/07 ..................            150,696             22.44                  150,696                   97,966
6/1/07-6/30/07 ..................             50,490             20.66                   50,490                   47,476
                                             -------             -----                  -------                  -------
Total ...........................            212,176             20.02                  212,176                   47,476
</TABLE>

(1)  On January 19, 2007, the Board of Directors authorized the repurchase of up
     to 547,194  shares,  or 10%, of the  Company's  common  stock.  The Company
     announced the repurchase  plan on January 23, 2007.  Purchases will be made
     in the open market and block trades will be  permitted,  all in  accordance
     with Rule 10b-18 under the Securities Exchange Act of 1934.

Item 4. Submission of Matters to a vote of Security Holders

  The Company held its annual meeting of  shareholders  on May 4, 2007. The only
  matter  voted on at the annual  meeting  was the  election of  directors  with
  results as follows:

         Directors elected to serve                   Authority      Broker
           a three year term            For           Withheld       non-votes
           -----------------            ---           --------       ---------

           L.  Wayne Pearson        4,552,181         146,731           -

           Robert M. Scott          4,663,968          34,944           -


The following  directors were not voted on at the annual meeting and continue to
serve until the years indicated:  Paul D. Hollen III- 2008; James H. Sexton, Jr.
- 2008;  James P. Smith - 2008;  Tommy B. Baker - 2009;  Stephen F. Hutchinson -
2009; and William A. Coates - 2009.


Item 6.  Exhibits

31-1 Rule 13a-14(a) Certifications of CEO
31-2 Rule 13a-14(a) Certifications of CFO
32   Section 1350 Certification





                                       20
<PAGE>


                        SOUTHCOAST FINANCIAL CORPORATION
                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act  of  1934  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                                    s/L. Wayne Pearson
Date:    August 1, 2007                    By:      ---------------------------
                                                     L. Wayne Pearson
                                                     Chief Executive Officer


                                                    s/William C. Heslop
Date:    August 1, 2007                    By:      ---------------------------
                                                     William C. Heslop
                                                     Chief Financial Officer



                                       21
<PAGE>

                        SOUTHCOAST FINANCIAL CORPORATION

Exhibit Index

31.1     Certification of Chief Executive Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

31.2     Certification of Chief Financial Officer pursuant to Section 302 of the
         Sarbanes-Oxley Act of 2002.

32       Certification  of Chief Executive  Officer and Chief Financial  Officer
         pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit
         is not "filed" for  purposes of Section 18 of the  Securities  Exchange
         Act of 1934 but is instead furnished as provided by applicable rules of
         the Securities and Exchange Commission.




                                       22